The Bombay High Court has upheld ITAT’s order where it was held that the period of 183 days as stipulated in Article 5(5) of India-Singapore DTAA will commence from the moment the drilling rig enters Indian territory in connection with exploration, exploitation, or extraction of mineral oil to meet the contractual requirement and not when the actual services under the contract begin.

The Division Bench comprising of Justice K. R. Shriram and Justice Firdosh P. Pooniwalla observed that “even though the actual contract was entered into with GSPC only on 18th June 2010, and accepting what Appellant states that the drilling work actually commenced on 03rd December 2010, still the fact that as on 27th April 2010, the rig was undergoing necessary upgrades/repairs to meet the GSPC requirements, in our view the rig was already in the contracting state for providing the services or facilities in connection with the exploitation, exploration or extraction of mineral oil as early as on 27th April 2010”.

Advocate Madhur Agarwal appeared for the Assessee while the Revenue was represented by Advocate Sushma Nagaraj.

The brief facts of the case were that the Assessee, a Singapore-based Company, engaged in the business of providing Jack-up drilling rig and platform well operations services, entered into an agreement with Gujarat State Petroleum Corporation Ltd. (GSPC) for the provision of the said services. The Assessee earned Rs.64.88 Cr from the GSPC and did not offer the same to tax on the ground that the drilling services were provided only for 119 days for the relevant AY, thus it would not be covered under Article 5(5) of the India-Singapore DTAA, as it requires the provision of service or facility for more than 183 days in the fiscal year. The Revenue noted that Assessee has consistently offered its income for taxation under Section 44BB and therefore, held Assessee’s income for the relevant AY to be taxable under Section 44BB. On appeal, the ITAT held the consideration to be taxable in India while observing that the services will be considered to begin the moment when the rig enters Indian territory.

After considering the submission, the Bench noted the Assessee’s claim that the date on which the count of 183 days will begin is only when the rig begins to perform under the contract, i.e. Dec 3, 2010, in the present case.

However, the Bench observed that if the rig started to perform in Dec 2010, then: (i) there was no need to bring the rig in India as early as in April 2010, (ii) there was no need to hold meetings with GSPC in April 2010, (iii) fittings could have been made outside the country and the rig could have been brought into India later.

The High Court further highlighted that if Assessee’s contention is accepted, then Assessee could always claim that since, in the middle of the contract of drilling, the rig broke down, thus on those days when the rig was not working should not be added in counting 183 days.

The High Court remarked that theoretically, it is possible that by March end the rig may have a sudden breakdown and in April the rig may start working again to escape the requirement of 183 days.

Observing that even though the actual contract was entered into with GSPC on Jun 18, 2010, and even accepting that the drilling work actually commenced on Dec 3, 2010, the Bench stated that still the fact that the rig was undergoing necessary upgrades/repairs to meet the GSPC requirements as on Apr 27, 2010, shows that the rig was already in the contracting state for providing the services or facilities in connection with the exploitation, exploration or extraction of mineral oil as early as on Apr 27, 2010.

“As per Article 5(5) of India-Singapore DTAA, an enterprise shall be deemed to have a PE in a Contracting State and to carry on business through that PE if it provides services or facilities in that Contracting State for more than 183 days in any fiscal year in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State”, added the Bench.

Thus, concurring with the ITAT’s view that the day from which such fabrication, positioning and upgradation, activity started which in the present case can be said to have commenced from Apr 26, 2010, as evident from the minutes of the meeting between GSPC and the Assessee, the Bench concluded that the Assessee would be considered to have an establishment in connection with its services and activity for GSPC.

Cause Title: Deep Drilling v. Deputy Commissioner of Income-Tax

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Bombay High CourtJustice K.R. ShriramJustice Firdosh P. Ponniwalla

Pankaj Bajpai